Let’s take a look at cost-of-living adjustments. Cost-of-living adjustments (COLAs) are given annually to maintain external equity since inflation is characteristic of modern economies.
They are a way to maintain the compensation system with no developmental dimension. These adjustments are provided to all employees, and simultaneously all salary grade scales are adjusted for new hires. In economic terms, failure to provide a cost-of-living adjustment is the equivalent of a pay reduction. Thus, many in the workforce today are not earning as much, on an inflation-adjusted basis, as they did earlier in their careers.
Since merit-based pay is politically more palatable, a single pool of funds based primarily on merit may be approved. Suppose a 3.5% raise pool is offered, but inflation is 2.75%. Merit monies are extremely limited—unless most people get raises less than inflation, relatively few employees can get increases in excess of 3.5%.
